Sanghyun Hong, Xiaopeng Wei, Blockbuster or bust?
Review of Finance, Volume 29, Issue 2, March 2025, Pages 603–632, https://doi.org/10.1093/rof/rfaf004
Individuals in an enhanced mood tend to assess future prospects more optimistically, which subsequently fosters greater optimism in their investment decisions and drives stock market returns higher. In the behavioral finance literature, mood measures are typically classified into two broad categories. The first category consists of endogenous indicators, where the underlying cause of mood shifts is difficult to discern. For instance, it is not completely clear whether individuals listen to happy music because they are already in a positive mood or if the music itself induces happiness. The second category includes exogenous but unpredictable indicators, such as the outcomes of sporting events, where the winner is unknown in advance, and the resulting market reaction is therefore uncertain. In this study, we introduce a novel mood metric — blockbuster movie release—that is exogenous and demonstrates a strong capacity to predict mood changes.
The psychological literature suggests, as a dominant form of media entertainment, movies generally enhance mood by providing enjoyment and escapism. With their release schedules and cinema screenings determined well in advance, often months or even years before their debut, blockbuster movie releases are not affected by mood-congruent behavior or equity market sentiment during the release week, allowing their effects to be clearly identified.
Employing U.S. movie data from Box Office Mojo in 21st century before the outbreak of COVID19, we find that the release of blockbuster movies presents a strong predictive effect on the market return in subsequent week, while it shows no significant correlation with contemporaneous market returns. The changes in weekly box office revenue and increased Internet searches for movie-related terms, such as popular theater chains, further affirm this relationship. Moreover, releases of blockbuster movies predict lower expected market volatility and risk aversion. The positive predictive effect on market returns is also evident in international markets with well-established movie industries.
Our study contributes to the literature the on how investor mood influences stock market dynamics. We introduce a novel approach by demonstrating that mood shifts can be predicted ahead of time based on exogenously determined blockbuster movie release schedules. These release dates are known in advance, making the mood effects foreseeable, with economically significant magnitudes. While traditional market efficiency theories assert that predictable effects should be fully arbitraged away, our findings suggest that this is not entirely the case, and we provide a psychological rationale to support our findings. Particularly, our paper challenges the misconception that mood variables are insignificant drivers of returns, unpredictable or unhelpful for investments, or incapable of distinguishing cause from effect.
Our study also contributes to psychology research that investigates the effects of movies on mood, many of which are based on laboratory experiments and other settings with relatively small numbers of participants who are shown movies without their own active selection. We test the implication of these psychological studies in in real-life settings where viewers actively choose when and which movies to watch in cinemas within the context of a very high-stakes field: the equity market. Our results suggest that blockbuster movies enhance mood.